How Does Block Ownership by Institutions Affect Corporate Governance

We investigate the role of institutional block holdings on the quality of a firm’s governance structure by using marginal cash valuation and future profitability as measures of a firm’s agency costs. We find that block holdings are negatively related to marginal cash valuations and future profitability. The negative relation is strongest for investment companies and advisors who hold large blocks in the second half of our sample period. We also find that the presence of such block holders is associated with lower profitability from capital investments, as well as higher CEO pay and lower CEO turnover following poor performance. Overall our evidence is consistent with the private benefits hypothesis that asset management companies owning large blocks impair governance to obtain lucrative investment business from management.